As Mobile Ad Prices Rise, Some App Developers Shift To Ad Tech

What is the cost of acquiring a loyal app user? Based on the testimonial of various industry insiders, the price is rising so quickly ad revenue can’t keep up. As such, app developers are looking for new ways to profit, often by developing ad tech.

Gartner predicts mobile ad spend will reach $18 billion this year, up from $13.1 billion in 2013. But with more advertisers investing in mobile, including apps, the cost to acquire loyal users is rising. Acquiring a loyal user (defined as someone who opens an app at least three times) increased from an average of $1.30 in 2012 to $1.62 in 2013, according to mobile app analytics firm Fiksu.

“It has become a race to spend the most money on advertising to move up on the charts,” said Jim Rainey, EVP of growth at the mobile game developer and marketing platform Midverse Studios, whose app portfolio includes Bingo Run and Bingo Vegas.

For publishers, this is a boon. Mobile app install ads are a major revenue source for Facebook. And Yahoo is testing in-app ads designed to drive downloads. The company declined to get into specifics releasing only a statement: “The purpose of these native ads is to help brands drive downloads of their mobile apps. These tests will begin to appear across all of our properties where in-stream ads run on iOs and Android devices.”

Twitter is also rumored to be testing its own app install ads, which it will presumably pair with its mobile ad exchange, MoPub, to offer advertisers greater targeting capabilities.

But for app developers, the growing price to acquire users through app install ads forces them to rethink their revenue strategies. Midverse for instance built customer engagement tools in the form of a user retention platform released last week called the AppEngage Network.

“We took a step back and said mobile is a big opportunity, and gaming is a big market [and] maybe there’s an opportunity here to build a different kind of ad network,” Rainey said. The AppEngage Network lets advertisers bid on in-app inventory that they are only charged for if a user completes an action. Users are rewarded with virtual currency or other prizes.

Instead of having users complete one-time actions, Midverse’s model is designed to promote repeated uses of a game, such as completing daily tasks to earn virtual currency, explained Rainey.

About a dozen app publishers are currently participating in the platform, some of whom are also advertisers, according to Rainey. Brand advertisers are not part of the mix yet, but Midverse is looking at ways to draw them into the platform.

“The trick for getting brand dollars is to determine what kind of actions brand advertisers are looking for and figuring out how to measure that. This is something that is part of our long-term plan,” he said.

Ironically, drawing more brand advertisers into the app space could further drive up the price of mobile advertising--the very situation that drove Midverse to develop ad tech tools.

“By Q4, brand advertisers are going to get into the app space because now they have access to this inventory and are going to drive the ad prices up,” said Lisa Marino CEO of game developer RockYou. “Game developers are going to be hurt because they can’t buy users anymore.”

Like Midverse, RockYou, is hedging its bets by moving away from developing games and into advertising services. To be successful at app development, Marino noted, “You have to be able to acquire users for less than what you make from them but every game goes into negative arbitrage over time … that’s why we decided not to build new games anymore and focus on the media side of the house."